By: Ettienne Bezuidenhout, Wealth Manager at Alexforbes
In an increasingly interconnected world, South African investors have access to a broader range of investment opportunities than ever before. One of the key strategies for maximising these opportunities is investing in global assets through a wrapper.
An investment wrapper is a financial product or account that ‘wraps’ around investments to provide certain tax advantages or other benefits. It typically allows investors to hold a variety of assets like stocks, bonds and funds within a single structure, while benefitting from specific regulations or protections. An example would be an endowment.
This approach not only diversifies your investment portfolio but also provides several financial and regulatory advantages that can safeguard and enhance your wealth.
1. Diversification and risk mitigation
One of the primary reasons for investing in global assets is to achieve diversification. By spreading investments across different geographic regions, industries and asset classes, investors can reduce their exposure to risks specific to South Africa, such as currency fluctuations, political instability or economic downturns. The Johannesburg Stock Exchange (JSE), while one of the Top 20 stock exchanges in the world, accounts for only about 0.3%-0.4% of the roughly $109tn in global stock markets.
Global markets often move independently of each other. When one region’s economy is underperforming, another might be thriving. This diversification can help stabilise your overall portfolio performance, providing a buffer against market volatility.
2. Access to high-growth markets and industries
Investing globally gives South African citizens the opportunity to participate in high-growth markets and industries that may not be well represented in the local economy. For example, the technology sector, particularly in the United States and Asia, offers investment opportunities that are not as prevalent in
South Africa. By investing in global assets, you can take advantage of these growth sectors, potentially increasing your returns.
3. Currency hedging
South Africa’s currency, the rand (ZAR), is known for its volatility, which can significantly impact the value of your investments. By holding assets in stronger or more stable currencies like the US dollar (USD), the euro (EUR) or the pound (GBP), you can hedge against the depreciation of the rand. This strategy is particularly important for investors who plan to spend time or retire in countries with stronger currencies, ensuring their investments retain value when converted.
One can also use the volatility of the ZAR to determine valuable entry and exit points into global markets. The ZAR tends to over time depreciate against the major currencies, so during times of ZAR strength it may be an opportune moment to increase one’s global exposure, and subsequently benefit from the global asset growth as well as the currency movement.
4. Tax efficiency and regulatory benefits of using a wrapper
Investing in global assets through a wrapper can offer significant tax advantages. Wrappers can help defer taxes on investment gains, allowing your investments to grow without the immediate impact of taxes on dividends, interest or capital gains, especially when utilising roll-up funds. In some cases, wrappers can also provide a more favourable tax treatment when the funds are eventually repatriated to South Africa. For instance, when investing in global assets directly, capital gains is levied only on the actual capital gain of the asset, not on the exchange rate, as it would be if one invests in a ZAR- denominated global feeder fund.
Moreover, investing through a wrapper can simplify compliance with the South African Reserve Bank (SARB) regulations on foreign investments. South Africans are subject to exchange control regulations, which limit the amount of money they can invest abroad. Wrappers often provide a legal and structured way to maximise these allowances while remaining compliant with local laws.
5. Estate planning and wealth preservation
A well-structured global investment portfolio can be a powerful tool for estate planning and wealth preservation. By holding global assets in a wrapper, you can protect your wealth from potential local economic crises and ensure that your assets are efficiently passed on to your heirs. Many wrappers offer estate planning benefits, such as bypassing local probate and situs processes, which can be very time- consuming and costly.
Cash in a foreign bank account could very well be subject to either or even both processes, which could severely delay and substantially increase the cost of winding up your estate. It may cause many grey hairs for your heirs, a situation that can easily be avoided through the prudent use of an appropriate wrapper.
Probate is the legal process through which a deceased person’s will is validated and their estate is administered. It involves proving the authenticity of the will, paying any debts or taxes owed by the estate, and distributing the remaining assets according to the terms of the will or, if there’s no will, according to state law.
Situs tax refers to the principle that a tax is levied based on the location of the property or asset being taxed. In other words, it pertains to the tax obligations that arise from where an asset is physically situated or where a transaction takes place.
6. Protection against local political and economic instability
South Africa has faced political and economic challenges in recent years, from fluctuating economic policies to concerns about political stability. While the country has many strengths, these factors can introduce risks that affect local investments. By diversifying globally, you create a safety net that insulates your wealth from local uncertainties, providing peace of mind and financial security.
Investing in global assets through a wrapper is a prudent strategy for South African citizens looking to diversify their portfolios, protect their wealth and capitalise on global growth opportunities. By leveraging the benefits of diversification, currency hedging, tax efficiency and estate planning, you can enhance your financial security and achieve your long-term investment goals. As always, it is advisable to consult with a financial adviser to tailor your investment strategy to your individual circumstances and ensure compliance with all relevant regulations.
